It’s been nearly impossible in recent years to hear or read the word “housing” without the word “bubble.” If you believe the news media, those two belong together, like “political” and “scandal.” Or “Britney Spears” and “irresponsible.”
Of course, the alleged housing bubble is of particular importance to the Los Angeles area, where the soaring house prices lately have flatlined. (For more, see the article
“Housing Price Slide Tied to Mortgage Hikes and Fickle Buyers”
.)
But for all the frothy blather about a housing bubble, it’s hard to see where one really exists.
Are house prices hereabouts too high? You bet. Are they due for a drop? A lot of smart people think so. But an overpriced market is not the same as a bubble, which is when markets go crazy.
One local economist believes home prices here may drop 5 percent this year. But even if they drop 10 percent, even if they drop 20 percent or 30 percent, those would not be drops of bubblish proportions. If house prices drop 20 percent, you’ll hear wailing from the financially stricken, sure, but you won’t hear the sound of a bubble popping.
For comparison’s sake, let’s look at a few true economic bubbles.
Most everyone’s favorite example is the so-called Tulip mania that infected what is now the Netherlands in the early 17th century. Then-new tulips were exotic and prized by the aristocracy, so investors started speculating and a frenzy got started. According to some accounts, a single tulip bulb could be swapped for land, livestock or even a house. By 1623, a single bulb of a sought-after variety could cost as much as six times the average yearly Dutch income. Trading got so fevered that some, instead of selling actual bulbs, sold rights to tulips they planted or just intended to plant kind of an early version of Internet stocks. You know, the ones that intended to have earnings.
The end, of course, was tragically predictable. By 1637, tulips had lost their fashionable mystique and buyers simply stopped paying exorbitant prices. Panic dumping following. Prices crashed 70 percent or more. People were wiped out.
Bubbles are rare, but we’ve seen a couple decent examples in recent years.
One occurred in the late 1980s in Japan, when land and stock prices got pumped up to fantastic proportions. The bubble popped in the early ’90s. Japan’s Nikkei stock index plummeted 60 percent and real estate fell about 80 percent.
And, of course, the U.S. tech bubble of the late 1990s and early 2000 was another recent bubble. In a three-year period beginning in March 2000, the NASDAQ skidded from more than 5000 all the way to about 1270, a drop of close to 75 percent.
The point: When a bubble pops, asset values plunge 60-70-80 percent. For the L.A. area to have a true housing bubble, it means today’s million-dollar home would drop in value to less than $500,000. That seems unlikely.
Funny, but I don’t recall the news media using the B-word to describe what was, in fact, a bubble the tech stock bubble of the late ’90s. Now, it’s the opposite. The B-word is casually trotted out to describe house prices, the Chinese economy, commodity prices and the frenzy of interest in Angelina Jolie’s baby bump.
The problem with this is that words are important. When we hear wildly overstated descriptions that are repeated, they pass as desperate warnings. We tend to overreact and make wrong decisions. Remember the money and time we wasted preparing for the stupid and false “Y2K meltdown”?
Housing here is very pricey. We could have a correction. It may hurt.
But a bubble we don’t have.
*Charles Crumpley is editor of the Business Journal. He can be reached at
[email protected]
.
